Councils rapped over Iceland cash

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Some local councils with money in Icelandic banks demonstrated a "lack of expertise" when dealing with public funds, a committee of MPs has said.

Investment decisions revealed "a significant level of misunderstanding, misinformation and complacency".

The Communities and Local Government Select Committee studied councils' £1bn of potential losses following the collapse of Icelandic banks in 2008.

But a group representing councils said that they had received poor advice.

Since 2004, councils have been able to regulate their own borrowing and investment. Rules state they can only put money in institutions with high credit ratings, they must invest in sterling and it must mature within a year.

Councils were warned in late September 2008 of changes in credit ratings for Icelandic banks, before the country's financial sector collapsed the following month, but some still invested after September.

The government welcomed the report and stressed that no council has cut services or raised council tax because of the investments.

"It is right that councils continue to make responsible investments of taxpayers' money," a spokesperson for Communities and Local Government said.

"But the report also makes clear councils need further support in making investment decisions."

Criticism

The committee's inquiry set out to investigate current practice in local authority investment, the roles and responsibilities of various groups and individuals involved, and the need to limit the exposure of funds to such risk in the future.

Our inquiry has exposed a significant level of misunderstanding, misinformation and complacency Dr Phyllis Starkey, Committee chairman

Numerous local authorities, charities, public bodies and UK savers had money within the Icelandic banking system when it collapsed during the height of the global financial crisis.

The committee said that councils' position was made worse by poor management of finances.

"While few predicted the events that shook the financial system last year, their exceptional nature provides no excuse for the substantial failures that occurred in local authority financial arrangements," said Dr Phyllis Starkey, who chaired the committee.

"Our inquiry has exposed a significant level of misunderstanding, misinformation and complacency - not just within local authorities, but also among those who provide them with specialist investment advice."

The Audit Commission, which put £10m of its own funds in Icelandic banks, was singled out for failing to spot the heightened risk to Icelandic investments at the time.

But the commission's chief executive Steve Bundred, said: "The Commission continues to acknowledge mistakes were made in the management of its own deposits with Icelandic banks but rejects the view that it should have issued stronger guidance to auditors before the banks failed."

The committee also claimed the Audit Commission did not issue rigorous enough auditing guidelines after the Icelandic banks collapsed. The Commission agreed that safeguards should be re-examined.

Recommendations

Local authorities should still be able to decide where they invest their funds, the report found.

However, it came up with a string of recommendations, including:

<ul class="bulletList" ><li>Better information and advice needed to be provided to councils' treasury departments on where to invest </li><li>More scrutiny of investment decisions, with an emphasis on security ahead of liquidity and profit </li><li>Adequate training for local authority staff and for each council to have an audit committee </li><li>Auditors of councils should focus more on their treasury management </li></ul>

The committee also called for a fresh examination of the role played by advisers to treasury departments, including a full investigation by the City watchdog - the Financial Services Authority - into these advisers' services and potential conflicts of interest.

The Local Government Association (LGA) also blamed the advice handed out to councils.

Iceland was at the centre of a financial meltdown

"This report clearly shows that councils were largely let down by the organisations that they were relying on to provide up-to-date and accurate advice," said Councillor Richard Kemp, vice chairman of the LGA.

"Failings across the entire system have affected not just councils but also other parts of the public sector as well as charities, businesses and individual savers."

He expected councils to get up to 90% of this money back through the administration process.

"Many local authorities have already overhauled the way that they invest and accept things need to be done differently in the future, but these investments have generated hundreds of millions of pounds every year that go towards keeping council tax down and frontline services in place."

A recent Treasury Select Committee report claimed that charities in the UK that lost millions of pounds when the Icelandic banking system collapsed should get a bail-out from the government, but local authorities should not be compensated.